A. Problem Analysis

1. What was the problem before the implementation of the initiative?

Bahia is the fifth largest State, the fourth most populous state with a population of over 14 million inhabitants, and the eighth richest Brazilian State. Despite this impressive numbers, its development and social inequality indicators are among the worst in the country. The GDP per capita is less than USD 5,000, ranking 21 among the 27 States. The State’s HDI is approximately 0.660 (the 22nd lowest in Brazil); its Gini coefficient is 0.559 (ranking 25), and the infant mortality rate is 23.1, one of the five largest in the country.
This panorama shows a State with many shortcomings in terms of infrastructure, mainly social infrastructure-related deficiencies. One of the State Government’s challenges in 2007 was to offer to the population, especially the poorest, solutions to the challenges in the social area, mainly as regards more access to quality health care and better schools – two of the areas prioritized for management of the current Government.
However, the Brazilian Fiscal Responsibility Law (LRF) imposes limits on the hiring of staff directly by the Government. Therefore, the Government was left with the challenge to expand social infrastructure without violating the LRF. Considering that the initiatives in the social areas listed as priorities are labor intensive, several strategies were implemented to overcome such limitations and offer the population a way out of the deficiencies found.
In health, specifically, the public authorities, in addition to the challenges relating to the recruitment and replacement of labor, also faced difficulties with the procurement of materials, purchase and maintenance of medical equipment due to the rigidity of bidding law. The expansion of the beds supply was critical due to the low number of hospitals and beds in the region, in addition to the challenges to provide quality service, and there was a clear demand in the State for new facilities and an innovative model for its structuring. Hence, in order to increase the offer and quality of health services in the region, the Bahia State Government, by means of the State Health Secretariat, decided to implement a private-public partnership model to an emergency hospital in the capital, the Suburb Hospital (HS). This model has been so successful that it has already been used in two other initiatives in the State itself.
The HS is located in the district of Periperi in Salvador, one of the poorest areas in the city, whose average monthly income was less than USD300. Before this PPP was implemented, the state had 4,939 public beds, representing 0.35 beds/thousand inhabitants, much lower than the Brazilian average of 2.8. Besides, since 1990, there was not a single emergency public hospital project in the metropolitan region of Salvador. The region where the Hospital was installed had only one hospital, which operated primarily as maternity. The population of the hospital attraction area is 1 million inhabitants and patients requiring emergency services were forced to travel considerable distances.

B. Strategic Approach

2. What was the solution?

Pursuant to the Brazilian Constitution, the whole population is entitled to receiving free access to health services. The Brazilian SUS (Unified Health System, acronym for Sistema Único de Saúde) aims, among others, to be universal and egalitarian regarding assistance to health demands, and must achieve widely and unreservedly all inhabitants of the country. In practice, 25% of the population uses private plans, and the SUS is responsible mainly for covering the low-income population. In Bahia, the percentage of users of SUS reaches 85% of the population.
Considering the State’s gap between the numbers of beds/inhabitants, when compared to the country’s average, the need to increase the amount of beds in the State was evident. To this end, the Government of Bahia has decided to build five large hospitals in different regions of the State. However, the question of how these hospitals would be operated remained unsolved. There were three possibilities: 1) direct operation by public servants; 2) operation by NGOs; and 3) operation by PPP. Option 1 was already ruled out due to LRF-related issues; option 2 was used for 4 of the units to be opened; and option 3 was adopted only for the HS, as there was no other unit in Brazil operating in this mode, which was used in just one unit on the basis of ideological issues involving the provision of public health services by private companies.
The main objective is to be achieved by structuring a PPP was the provision of high quality service to the population, comparable to the best private hospitals in the country, creating a new benchmark for public health.
The participation of the private sector in the HS, via a long-term contract, considerably improved the general service levels when compared to the rest of the State and allowed the operation of the unit to be made in compliance with the fiscal responsibility law. Additionally, it reduced the public authorities’ transaction costs, which previously had to deal with hundreds of supply and maintenance contracts, changing now for only one contract, surpassing bidding law issues, which sometimes hinders the operation of a health facility depending on the seriousness and urgency of meeting the needs of patients.
The PPP increased the control and governance, enabling the infrastructure to be financed by the private partner by means of longer contracts. Thus, it aligned private and public interests and created the necessary economic incentives to improve the behavior and productivity of the private partner. This was done by means of performance-related payments, thus solving problems related to the lack of maintenance and renewal of public facilities and infrastructure, difficulties in hiring staff, and salary limitations. The greater efficiency of the private sector allowed for the provision of better services.

3. How did the initiative solve the problem and improve people’s lives?

The HS was the first health PPP in Brazil. The model was innovative for public health and has a great replication potential. Since its bid in 2010, other Governments have announced Health PPPs.
The HS PPP has pioneering characteristics in the country, such as the inclusion of clinical services and the introduction of performance indicators with qualitative and quantitative goals, tied to the payment of consideration.
Mechanisms were also created for transparent and impartial performance monitoring, and each indicator was monitored by an Independent Verifier. Additionally, a structure to guarantee payments of public consideration, reducing the private sector’s risk perception. This structure establishes the use of resources from future revenues of the States’ Participation Fund (PEF) for use in the State of Bahia, ensuring that 18% of the resources be separated by the Payment Agent and immediately applied on the payment of PPP project concessionaires executed in the State.
Aiming at transparency and competitiveness, as per the best domestic and international practices, this was the first Health PPP project offered in the stock exchange (Bovespa) of São Paulo-Brazil.

C. Execution and Implementation

4. In which ways is the initiative creative and innovative?

The project was developed through a phased approach, divided in two phases. Phase 1 comprised the design of the transaction structuring. It included technical, environmental, financial and legal due diligence. Phase 2 comprised the drafting of transaction documents, promotion, the bidding process and auction, followed by contract award.
The structure of the Project followed the “BOT-Build, Operate and Transfer” model, which in this case excluded building, but included equipping, maintaining and operating all clinic and non-clinic services of the hospital through an administrative concession for a period of 10 years, renewable for another 10 years. The total amount of private investment was estimated in approximately US$ 32 million over the concession period.
The revenue model was based on Government payments, which were linked to the quality and availability indicators, measured through 31 performance indicators, with discounts for low performance.
The performance indicators were developed based on the following pillars: (1) operational auditing; (2) care performance; (3) quality of care; (4) clinical management; (5) inclusion in the health system; (6) management of people; (7) satisfaction surveys; (8) planning and coordination of patient care; and (9) accreditation of the hospital within 24 months, from the start of operations.
The project was awarded to Prodal Consortium, composed by ProMedica and Dalkia. ProMedica is a regional operator of medical services in the Northeast of Brazil and Dalkia is a French company managing infrastructure management services, including non-clinical services. The concession agreement was signed on May 28, 2010, and operations began in September 2012, after only 14 months since the PPP contract signing, which is considered a record time, when compared to other Brazilians infrastructure projects

5. Who implemented the initiative and what is the size of the population affected by this initiative?

In April 2009, the State Government, decided to grant to the Private Sector the provision of services of the HS. In order to structure the project, the Bahia Health Secretariat, signed a cooperation agreement with the International Finance Corporation (IFC) and the Brazilian National Development Bank (BNDES), which would support the Government in carrying the technical, financial and legal studies for the development of a hospital PPP project. The model was developed with the support of the Brazil PSP - Private Sector Participation Facility, a fund established in 2008.
IFC was appointed as the project’s lead advisor, thus supporting the Government in the development of the PPP structure, which included, among others, the following activities: technical, financial and legal studies and feasibility analysis, preparation of the draft and the final version of the bidding documents, mapping of potential investors and project promotion.
In order to promote transparency and seek for contributions from the civil society, the Government held Public Audiences and made available the drafts of the bidding documents in the project’s website. Since the HS PPP was the first to be implemented in Brazil, the Government was aware of the importance of engaging with the population at an early stage, sharing information with the population and the market.
With the support of the IFC, the Government also promoted Road Shows and market sounding, striving for an opened dialogue between the public and private sector. The Government was aware that the innovative nature of the project would demand closer interaction with investors, as a new market was being developed in the country. Therefore, meetings were held with several companies from the health sector, including Promédica, GE Capital and hospitals Sírio-Libanês and Albert Einsten. This engagement was crucial, especially in regards to the development of performance indicators and risk allocation.

6. How was the strategy implemented and what resources were mobilized?

The cooperation agreement within Bahia State Government and the IFC and BNDES, making an upfront payment of USD 145,000 to fund part of the technical, financial and legal studies for the structuring of the project. Once the project was tendered, the winning bidder, reimbursed IFC/BNDES for the remaining costs of US$1 million, charged as success fee. These fees financed the costs of specialized technical and legal consultants, as well as the staff and travel costs of the IFC team.
Besides the advisor team the Bahia State Government allocated twelve civil servants in the project to follow up the advisors products and to give inputs to the technical model. The governance of the project included: public advocacy, secretary of treasury, secretary of state, secretary of management, and secretary of health.
After assigning the contracted, the private partner got a loan to buy the equipments and to start running the services.

7. Who were the stakeholders involved in the design of the initiative and in its implementation?

Structuring the HS as a Public-Private Partnership generated important results for the health sector in Bahia, assessing most of the problems encountered before its implementation and considerably improving the overall efficiency of services provided to patients.
The 298-bed facility provides traditional emergency care as well as specialized treatment for trauma, orthopedic and cardiac emergencies, and other complex injuries. The hospital is equipped with a surgical center, one clinic, medical laboratories, one physical therapy unit, one hemodynamic unit, and one pharmacy.
The PPP model, implemented through a long-term contract, allowed an increase in governance, transparency and stability. It also contributed for the generation of a benchmark for the public sector; aligning interests between the public and private partners, with a clear risk allocation. The participation of the private sector resulted in higher quality and operational efficiency of the services provided in the hospital, ensuring technology maintenance and renewal.
In the first years of the concession, the hospital presented high performance levels, with a high solvability index, greater speed in performing emergency surgery, higher turnover of beds (a minimum of 4.9 is required and currently it is 23.6), low rate of hospital infections (6.5 per 1000 patients, considerably below the maximum rate required of 20), high level of user satisfaction (between 85% and 95%) and high professional qualification.

8. What were the most successful outputs and why was the initiative effective?

This is one of the few PPP health projects in the world that encompasses the performance indicators mechanism. There is a contract requirement for regular auditing by a qualified independent monitor of all the performance and volume indicators, which impacts the government annual payment to the private partner. The auditing process happens every 3 months and the private partner must provide all data and documentation needed. Evaluations are disclosed in the PPP website.
Financial statements auditing is also required in accordance with the higher standards in Brazil, which represents an innovation in terms of transparency.
Moreover, the private operator must provide the following services: implementation of a hospital information system, a help-desk system to report client complaints and accounting system, with minimum requirements, to ensure transparency and easier auditing of the performance indicators, as well as on-line access to the Health Department team and its independent monitors.
The secretary of health created a commission to track, monitor and supervise the service delivered, beyond this committee where there are discussions about the rebalancing of the contract, the secretariat of the farm is also involved in the analysis.

9. What were the main obstacles encountered and how were they overcome?

One of the challenges and concerns regarding the HS PPP was that the market would not be mature enough to undertake such transaction, ultimately resulting in an empty bid. In order to overcome this risk, the Government promoted several road shows and market sounding, thus making sure to provide all the necessary information to investors, endorsing a competitive and transparent bidding process. In addition, by engaging with the private sector, the Government concluded that the market was not willing to bear the risks regarding changes in demand, health patterns or the health network. With the objective of overcoming this issue, the Government included the provision of frequent revisions and the economic equilibrium clause.
Another major challenge was the dynamism of the health sector, which increased the complexity of defining proper indicators. In order to overcome this issue, the Government included frequent revision in the PPP agreement.
In Brazil, one of the main challenges of the public administration is to provide good payment guarantees that shall reduce the perceived default risk by operators and financiers. In view of this, a payment mechanism was put in place to enhance the project’s credit rating as well as leverage financing alternatives. This mechanism – approved by law - enables future state PPP concessionaires to receive state PPP government payments directly from the “States Participation Fund” (FPE), a constitutional fund created with the pool of federal taxes collected at the sub-national level. As per the approved law, 12% of the FPE resources disbursed to Bahia State are fully allocated to pay the PPP commitments. The funds are transferred to an escrow account at Banco do Brasil (a top credit Brazilian Federal bank) which has the responsibility to transfer the funds to the private partner when government payment becomes due. Excess funds are returned back to the State Treasury department.

D. Impact and Sustainability

10. What were the key benefits resulting from this initiative?

This project introduced an innovative approach to hospital PPPs in Brazil. This is the first time that a PPP had been implemented in Brazil’s health sector compliant with the PPP Law, which requires that the PPP include private investment and allocation of risk to the private sector. Other PPP-type arrangements existed in the health sector, but these were service contracts for which the private sector was reimbursed based on costs incurred, and which had a period of only one year, renewable for up to five years (this is called the OS model).
The PPP contract for the HS has a period of ten years and is renewable for another ten years. It involves private investment in equipping the hospital. The private party has full control over hospital operations and staff, which was another innovative element that can be difficult to achieve in the context of public sector unions and public perception of health as a public service. The PPP model allows the public sector to internalize the efficiency of the private sector. The hospital is in a relatively poor area of Brazil (State of Bahia) and serves a poorer segment of Salvador’s population that had been severely underserved until this transaction took place.
This PPP also introduced a results-based payment structure that strengthens the private party’s incentives. This was truly an innovation in the industry, as it allowed the health sector to focus more on quality, rather than only setting goals for volume.
The hospital opened on September 13, 2010. By march 2012 it had already exceeded its targets on number of patients treated, serving nearly twice as many (1.8 times) inpatients and outpatients as in the targets in the PPP contract, and providing over twice as many (2.3 times) diagnostic services. In its first year of operations, it served just under 350,000 inpatients and outpatients and provided nearly 530,000 diagnostic services. The hospital has also created 1,200 new positions for doctors, nurses, physiotherapists and other health professionals. These strong numbers demonstrate that the hospital is providing services that are greatly demanded among the target population.
The participation of the private sector allowed for a higher performance management with a high index of solvability, greater agility in performing emergency surgery, higher turnover of beds, low rate of hospital infections, high level of user satisfaction, low rate of mortality, high professional qualification and accreditation of the hospital in 18 months.

11. Did the initiative improve integrity and/or accountability in public service? (If applicable)

Being an innovative initiative for the public health, the HS has high demonstration effect. Its facility and management model became a benchmark not only for the healthcare system in the state of Bahia, but also for the Brazilian healthcare system and to other countries, such as, India, Turkey, Colombia, among others. Currently, six other Brazilian states are developing PPPs in the sector. Innumerous authorities from other states and municipalities in Brazil have visited the HS, aiming to replicate the successful model.
The Hospital Unit has been featured in several national and international publications and received relevant awards. The consulting firm KPMG classified it as one of the top one hundred public infrastructure projects in the world over the last five years; the World Finance magazine considered it one of the best PPP projects in Latin America and the International Finance Corporation, along with the Infrastructure Journal, ranked the hospital as one of the top ten best Public Private Partnership projects in Latin America and Caribbean.
Ever since the successful closure of the HS project, the State Government of Bahia has already structured and successfully awarded five other infrastructure projects under a PPP model: three health, one metro and one stadium.
The system of ocean sewage provisions of the metropolitan region of Salvador. The PPP contract was signed in December of 2006 with Odebretch Ambiental. The private partner is expected to invest in the construction and operation of the system.
The Instituto Couto Maia PPP encompasses a hospital of reference in infectious diseases. The PPP contract was signed in May of 2013 with a consortium formed by companies MRM and SM Hospital. The private partner is expected to invest US$ 46 million in the construction and equipping of the unity.
The second health project encompasses imaging and diagnostic services in 12 hospital units in the State, connected to a diagnostic center to be located in Salvador. The concessionaire will be responsible for building, equipping and maintaining an integrated network that shall expand and improve access to complex, high technology imaging tests. The project was awarded in August 2014 to the AFP consortium (Alliar, Fidi and Phillips). The PPP contract is expected to be signed by the end of October, 2014.
The metro PPP contract was signed in October 2013 with consortium CCR. The project scope includes concluding the construction and operating the metro system of Salvador and Lauro de Freitas.
Bahia also structured a PPP for the reconstruction and operation of the Fonte Nova stadium in Salvador. The winning bidder was the consortium composed by construction companies Odebrecht and OAS. Contract was signed in January 2010.
Therefore, the structuring and implementation of the HS PPP was crucial for the development of other PPPs in the State of Bahia. The HS experience allowed the Government’s technical staff to develop the necessary skills to structure and manage such complex contracts, thus contributing to position the State of Bahia as a pioneer state in regards to PPP projects in Brazil.

12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)

The HS PPP aimed to create a benchmark for public health in the country and create a model that could be further replicated in other states and municipalities. Being a pioneer initiative in Brazil, there were no guidelines for the project and many lessons were learned along the experience:
1) It is not easy to shape a new market, as it was no simple task to attract investors given the pioneer model. This resulted in a smaller group of interested investors and the need for a higher risk premium. Market soundings and a road show covering most of the players in the sector and engagement of sector associations were key to disseminate the project and buy-in support from health sector players for PPPs as a new model for the public administration
2) It was not easy to define proper indicators. Brazil has already some relevant experience with health indicators, which, combined with some selected international references, served as the basis for the performance indicators. Yet, given the dynamics and uncertainties of the health patterns, there is a need for frequent revisions.
3) Primary care has a big relevance in reducing hospital excess demand and pressure at the urgency care, and ensures higher quality, especially in a region with limited healthcare available for the population.
4) Private sector will not take risks that they cannot control, with implications in demand, or changes in health patterns, with cost implications. These types of risks were allocated to the Government, through frequent revisions and the economic equilibrium clause.
5) It is possible to combine public work and PPP project for complementary investments. In HS the private partner only equipped the hospital as the project was already under construction when the Government decided to implement a PPP. On the other hand the public administration did not benefit entirely from efficiency gains in construction and related risk allocation to the private partners.
6) It is necessary to find a balance between contract flexibility (for the revisions) and stability (of the contract).
7) Monitoring and proper reporting systems are essential. The contract foresees an independent monitor which will review and audit the performance reports, and regular accounting/auditing following Brazil’s best accounting practices.
8) Value for Money was of little practical use for decision making given the lack of historical data. The State did not have costs properly recorded for its health units and there is very little experience in Brazil to be used as a reference to price the risks allocated to the private partner. Comparisons with public hospitals benchmarks were used to assess the affordability of the project.
9) Political schedule matters. The state electoral cycle was a vital determinant of the transaction timetable. With state elections scheduled for October 2010, all the secretaries and decision-makers were focused in meeting the project’s timetable.